Rajib Patra is a 45-year-old living with his family comprising his spouse Mahuya, aged 37-year-old, two daughters, i.e. Ritu (16) and Rai (7). Mr Rajib has a jewellery business. His monthly income is Rs 1,40,000. Of this, Rs 53,667 goes towards household expenses, Rs 20,000 for education of two daughters, Rs 20,000 towards home loan EMI, Rs 20,000 is contributed to dependent parents, Rs 8,333 goes towards insurance premiums and Rs 18,000 goes into investments.
Financial Goals
Rajib’s goals include building a corpus for his children’s education, marriage expenses and for his retirement. Financial advisor Pankaaj Maalde analyses his monthly cash flow, existing investments, insurance policies and future goals.
Analysing Life Insurance Portfolio
Rajib has six traditional and one pension insurance plans. He pays annual premium of Rs 85,000 on these policies. Analysing his insurance portfolio, Pankaaj recommends continuing all the traditional plans as debt portion in his portfolio and to continue with his pension plan. As per need based theory, Rajib is inadequately covered for life insurance. So, Pankaaj advises him to buy an online term plan of 15 years for Rs 1 crore, at a cost of Rs 31,000 p.a.
 
Health and Disability Insurance Planning
As for health insurance, Rajib has bought a policy with a cover for Rs 5 lakh from Oriental Insurance. This policy has room rent sub-limit of 1% of sum assured. So, Pankaaj advises him to port the same to another insurer, which does not have such sub-limit clause and also increase his sum assured to Rs 10 lakh. This will cost around Rs 30,000 p.a. He even advises Rajib to buy critical illness cover of Rs 25 lakh and accident disability insurance of Rs 50 lakh. This will incur cost of approx Rs 22,000 p.a., but ensures a cover for him in case of future misfortune.
The Road Ahead
Contingency Funding: Rajib must set aside three months of expenses as a contingency fund, which amounts to Rs 3.24 lakh. For this, Pankaaj aligns his existing saving bank balance of Rs 80,000, postal investment of Rs 2 lakh and fixed deposit of Rs 50,000. He advises him to invest the amount in ultra-short-term funds.
Repayment of home loan: Rajib has outstanding home loan of Rs 4 lakh. He is paying EMI of Rs 20,000 at interest rate of 10.75%. Pankaaj advises him to sell the plot of land and repay the entire home loan. This will make him debt free and savings of EMI can be used to build the desired corpus for his future goals.
For life’s major goals Pankaaj advises:
Children’s education: Ritu, elder daughter of Rajib, requires Rs 8 lakh in present value for her education after two years, which will grow to Rs 9.33 lakh (future value). Pankaaj has allocated Rs 8 lakh from the sale value of plot of land and advises Rajib park the funds in an arbitrage fund till the goal is achieved.
Similarly, Rai, his younger daughter, requires Rs 15 lakh in present value for her education after 11 years, which will grow to Rs 35 lakh (future value). Pankaaj has allocated existing mutual fund investments in Birla Sunlife Frontline Equity, Sundaram Smile and Franklin Templeton Blue Chip. The current value of investment in these schemes is Rs 1.89 lakh, Rs 1.36 lakh and Rs 42,000, respectively. He advises to continue monthly SIP of Rs 3,000, Rs 2,000 and Rs 2,000, respectively, in these schemes to accumulate the desired corpus.
Children’s marriage fund: To build a corpus for Ritu’s marriage, Rajib requires Rs 15 lakh in present value. The required corpus will grow to Rs 30 lakh (future value) after nine years. Pankaaj advises Rajib to start monthly investment of Rs 15,000 in an equity fund and Rs 1,000 in a gold fund. Similarly, for his younger daughter Rai, Rajib requires Rs 15 lakh in present value. The required corpus will grow to Rs 60 lakh (future value) after 18 years. To achieve this goal, Pankaaj allocates direct equity investment of Rs 7 lakh and advises to start monthly investment of Rs 1,000 in gold fund. Pankaaj even advises shifting direct equity investments to a diversified equity mutual fund scheme. This execution should accumulate the desired funds for his daughters’ marriage.
Retirement funding: Rajib is planning to retire at the age of 60 year. Pankaaj aligns his existing investments in second home, commercial property, mutual funds (HDFC Mid-Cap Opportunity and Reliance Equity Opportunity), PPF and insurance maturity. This promises Rajib amounts of Rs 3.34 crore, Rs 83.5 lakh, Rs 6.63 lakh, Rs 28.55 lakh and Rs 28.82 lakh, respectively, after 15 years, as his retirement corpus. Additionally, Pankaaj advises that Rajib continue his monthly investment of Rs 3,000 in each of the two mutual fund schemes (HDFC Mid-Cap Opportunity and Reliance Equity Opportunity) to build the desired corpus for his retirement. This execution will aid him in building his desired corpus for retirement, which is Rs 5.14 crore, and will be used up to 80 years of age after retiring at 60. The corpus required has been calculated assuming household expenses of Rs 52,500 per month in present value at 8% inflation.
Concluding remark
- Rajib has higher exposure to real estate (82% of overall portfolio). This is too high and not desirable. So, it’s strongly recommended he sell the plot of land amounting to Rs 12 lakh. He is also advised to review his other real estate investments at regular intervals.
- Shift existing investments in direct equity to diversified equity mutual fund schemes.
- Reinvest insurance maturity into balanced category of mutual funds.
- Review the plan and rebalance portfolio periodically, preferably every year.
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